Are investment expenses and financial advisor fees tax deductible?

It’s no secret that the world of digital assets is exciting and, for traders who make the right moves, highly profitable. But new crypto investors often underestimate the true cost of entering the altcoin market, where unexpected fees can quickly add up and impact overall gains.  

While crypto investment fees aren’t deductible, generally speaking, there are ways to save on taxes. This guide explains the different costs of investing in crypto and offers tips on reducing your tax liabilities.

What are investment fees?

Investment fees are additional costs that both crypto traders and traditional investors incur beyond their initial investments. These fees can significantly impact profitability, so it's wise to also invest time in researching the various types to manage costs effectively.

Transaction fees

Both decentralized exchanges (DEXs) and centralized exchanges (CEXs) impose transaction fees, though the structures vary. 

DEXs typically involve gas fees, which are network fees tied to blockchain activity. These fees can fluctuate significantly based on network congestion, making them unpredictable. DEXs may also include platform-specific charges. 

In contrast, CEXs usually charge a flat fee or a percentage of the transaction amount. They might also impose withdrawal fees, which can accumulate, especially for frequent traders. 

These transaction costs can quickly reduce overall profitability, particularly during high network activity periods.

Account fees

Also known as platform charges, account fees are imposed by trading platforms for maintaining accounts and providing services like security, customer support, and administrative functions. These fees are often calculated as a percentage of the total assets held in the account. 

However, some platforms offer flat-rate options, providing more predictable costs. In some cases, platforms may waive these fees if certain conditions are met, such as maintaining a minimum balance.

Foreign exchange fees

When investing internationally, traders might encounter foreign exchange fees when converting one fiat currency to another, e of a trade and the actual price at which it is executed. Slippage can significantly impact high-volume traders because even small deviations can lead to substantial losses.

• Staking and lending: In the DeFi space, staking and lending come with their own set of fees. These can include network fees for processing transactions, platform fees for using the service, and potential penalties for early withdrawals. Understanding these costs is crucial for managing investments in the DeFi ecosystem.

Are investment and financial advisor fees tax deductible?

Due to the Tax Cuts and Jobs Act of 2017, most investment-related fees, such as management and financial advisory fees, are no longer tax-deductible. Prior to this law, taxpayers could deduct these expenses as itemized deductions if they exceeded 2% of their adjusted gross income (AGI). For example, with an AGI of $300,000, any expenses over $6,000 could have been deducted. However, this option has been suspended through tax year 2025, impacting the ability to write off costs like advisor, custodial, and legal fees.

Despite this change, traders can still deduct investment interest expenses, which are amounts paid on money borrowed for investment purposes. This deduction can be applied to various assets, including Bitcoin and other cryptocurrencies, where the funds were borrowed but only up to the amount of net investment income. Interest on margin loans used for purchasing investments may also be tax-deductible.

Furthermore, transaction fees are typically factored into your tax reporting, either by adding them to the cost basis of the acquired asset or deducting them from the proceeds when the asset is sold. These fees ultimately impact the overall capital gain or loss.

Given the evolving nature of tax regulations, it's important to stay informed about potential updates that could impact your deductions and overall tax strategy. Regularly reviewing IRS guidelines or consulting with a tax professional can help you navigate these changes effectively.

Six ways to save money on investment taxes

When it comes to reducing taxable income, traders have a few strategies at their disposal. From leveraging capital losses to taking advantage of retirement account contributions and benefiting from lower long-term capital gains rates, these methods can help minimize tax liabilities:

1. Realize capital gains losses

When traders sell an asset for less than its purchase price, the difference is a capital loss, which is tax-deductible. Strategically selling assets at a loss can help offset capital gains taxes. Traders can deduct up to $3,000 in capital losses annually to reduce their ordinary income.

2. Contribute to 401(k) and traditional IRA contributions

Contributing to retirement accounts like a 401(k) or IRA can lower taxable income, offering significant tax benefits. The contributions reduce a trader’s taxable income, with the deduction reported on the relevant tax form.

3.  Look for lower long-term capital gains rates

Holding assets for more than a year may qualify traders for lower long-term capital gains rates, which range from 0% to 20%, depending on the trader’s income. These rates are often lower than short-term capital gains rates.

4. Track all your investment expenses

Accurately tracking and managing crypto trade expenses is essential for effective tax reporting. A portfolio tracker like CoinTracker’s helps organize these costs, making it easy to include them in your tax records.

5. Understand each type of investment expense

Different types of investment expenses are treated uniquely under tax law. Trading fees, wallet maintenance costs, and advisory fees are just a few examples, each with distinct tax implications. Familiarizing yourself with these distinctions ensures accurate tax reporting and helps you take advantage of any potential deductions.

6. Consider fees before executing trades

Before initiating a trade, weigh any associated fees, as these can impact your profits. Planning your trades with fees in mind helps minimize costs and ultimately maximize the amount of cryptocurrency you retain.

Simplify crypto taxation with CoinTracker

Crypto taxes are complex, and with the IRS frequently updating rules for digital assets, keeping up can be a challenge. Fortunately, traders no longer need to navigate the tax code alone to determine what they can deduct and how much they owe. 

CoinTracker simplifies the process with just a click. By syncing your wallets, CoinTracker ensures accurate accounting for every transaction, preventing costly tax mistakes. With automatic DeFi detection and robust security, you can rest easy knowing your taxes are done right every time. 

Start for free, and discover why more than 2 million crypto traders trust CoinTracker to save time and minimize their tax liabilities.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.